Construction sector faces higher steel costs

MANILA, Philippines - The construction and real estate sector should brace for the effects of the global surge in iron ore prices that could lead to increases in the cost of finished steel products in the country by at least 30 percent, the National Economic Development Authority (NEDA) warned yesterday.

NEDA director Dennis Arroyo said the development was “flagged” during the Cabinet meeting at the Palace yesterday. This prompted President Arroyo to order Trade and Industry Secretary Jesli Lapus and other concerned agencies to immediately implement measures to protect the sector as well as their respective consumers.

The President also directed the Department of Trade and Industry (DTI) to make sure that there would be no artificial shortages and price increases as well as prevent possible hoarding of steel products in the country, Palace officials said.

Arroyo said global prices of iron ore, from which steel products are made are expected to increase 100 percent because of a new pricing system apparently put in place by an oligopoly of the world’s top three iron ore producers — Vale SA, BHP Billiton, and Rio Tinto.

“A new threat has arisen to the construction industry: rising iron ore prices,” Arroyo said in his presentation to the Cabinet.

“The 40-year-old pricing arrangement of annual negotiations has been replaced by quarterly pricing. The problem is, the shorter the pricing period, the more leeway for market speculation and volatility,” he said.

He said Eurofer, which represents European steelmakers, has warned of illicit price manipulation by the biggest iron ore producers.

Arroyo said the doubling of world iron ore prices is initially estimated to lead to a 30 percent increase in steel prices.

He said local industries could start to feel the impact of the global price increase at the end of the month based on DTI estimates.

He said it would be too early to determine its impact on the country’s growth targets for the year.

“It will impact on construction. That will be the damage. One solution is that, the US offers the cheap ingredients of steel, coking coal and scrap. We may turn to them. That’s one avenue to explore,” Arroyo said.

He said US steel inputs are largely isolated from the global market and is a net exporter of the chief ingredients of steel: iron ore, coking coal and scrap.

He said the Philippines is still a net importer of steel and iron amounting to about $1 billion annually even if it produces its own ore.

Construction accounts for about 12 percent of the industry sector of the country’s gross domestic product (GDP). The industry sector accounts for about 32 percent of GDP.